Monday, September 01, 2008

Weekly Wrap

Here is the weekly recap from

We said at the beginning of the week that participation would be on the low side, but that low volume didn't preclude the market from making big swings. In fact, big swings in the major indices are an ordinary happening in thinly-traded markets.

As it turned out, the market stayed true to the form we predicted.

Volume totals at the NYSE were at their lows for the year in each of the first three sessions this week, and didn't exceed 1.0 billion shares all week. In that span, we saw the S&P 500 drop 2.0% on Monday, gain 0.4%, 0.8% and 1.5%, respectively, Tuesday through Thursday, and then drop 1.4% on Friday.

The net result is that the market ended the week down 0.7%.

A gloomy earnings report from Dell (DELL) after Thursday's close and a report that personal income fell by a larger-than-expected amount in July interrupted what was shaping up to be a winning week for the market. That combination led to a broad-based selling effort Friday ahead of the holiday weekend.

From an economic standpoint, the personal income report was the only true disappointment for the week. Outside of that report, the remaining notable releases -- existing home sales, new home sales, consumer confidence, durable goods, initial claims and revised Q2 GDP -- all brought relatively good news.

The biggest surprise of all was the latter report. Second quarter real GDP was revised up to 3.3% from 1.9%. Favorable revisions to net exports, inventories and personal consumption were the major drivers for the upgraded measure of growth.

The revised GDP number showed the economy was a long way from recession in the second quarter. Heck, the 3.3% rate of growth is even above the long-term trend.

Clearly, the fiscal stimulus package has helped in this period while the weaker dollar has been a major boon for exports. What's more is that the trends in the data so far suggest real GDP growth in the third quarter shouldn't be that far off from the second quarter.

Speaking of direction, Hurricane Gustav is moving its way through the Gulf of Mexico and is currently projected to make landfall somewhere along the Gulf Coast as a major hurricane early next week. Its impending arrival is forcing the closure of oil rigs in the Gulf, yet it was remarkable that oil prices gained less than 1.0% for the week in the face of that threat and a festering geopolitical situation with Russia.

Word from the Department of Energy that it will release oil from the Strategic Petroleum Reserve to combat the supply disruption from the hurricane proved to be a mitigating factor that kept oil prices in check.

Separately, neither Fannie Mae (FNM) nor Freddie Mac (FRE) was held back this week. Granted they ran into some profit taking on Friday, but the absence of any bailout news and some relatively successful debt offerings paved the way for big gains in the stocks. At their highs on Thursday, FNM and FRE were up 59% and 92% from the prior week's close.

Ahead of the Labor Day weekend then, it is evident that the real economy is functioning better than many reports suggest. Given the light volume, though, a verdict on the stock market's direction will have to wait until the conventional wisdom of the crowd returns from vacation to supplant the trading inclinations of a smaller group of participants.


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